Ever since we were a child, we have been taught the importance of saving by our parents and our teachers in school. I remember I was given a monthly allowance when I was a small child and I bought a piggy bank in which I used to put in part of my allowance. Later when I needed to buy something, I used to use that stash of cash for my little treats.

But when we grow, we often forget the importance of saving and start to spend money on things which we don’t need or places we could have avoided. However, it is important to inculcate the habit of saving consistently to put that money someplace where it will be put better use to rather than on unnecessary expenses.

Now the question arises how much to save and how to start?

You must have heard of the unpredictable English weather. It is sunny now and the next moment it is raining, gets sunny again and in a jiffy it starts to snow. This is how life is. Today you may be earning well, meeting all your expenses and leading a happy life. But what if suddenly something happens and you lose your job? Or maybe a sudden need for money arises for something unexpected.

For these uncertainties, you need a ‘rainy day’ fund, which can be built only if you start saving.

Typically a ‘rainy day’ fund contains three to four months of living expenses in case you lose your job or meet with an unexpected need for the extra cash. First, add up your basic monthly expenses: Rent, utilities, food, commuting costs, toiletries/household items, etc. Multiply by three. That's the minimum number you're trying to save. If you can't realistically ballpark your monthly expenses are, track every rupee you spend for 30 days.

Start your emergency fund even if you are paying off debt. Try this: For every Rs 10 you can save, funnel Rs 7 toward reducing your debt and Rs 3 toward your emergency fund (so if you can save Rs100, put Rs 70 toward your credit cards and Rs 30 into your savings). When you get two months' worth of emergency funds in place, switch back and put all your capital into paying down your debt. When the debt is paid off, return to building your emergency fund. Stash your savings in an account that you can access quickly and easily; where there is no risk of losing your money; and where the monstrous inflation doesn’t eat up your money. Here are a few options where you can stash your savings:

Fixed Deposits

Liquid Funds

Fixed Maturity Plans of mutual funds

Tip: Make savings a permanent part of your budget.

Beating Inflation

Another variable to factor into savings is inflation or the decline in the buying power of a rupee over time. Inflation is the single greatest threat to your future financial well-being. It results in the constant, steady erosion of money's value.

You must have heard of time value of money. A rupee today is not always worth a rupee tomorrow. Its value decreases over time. Simply put, as inflation goes up, your purchasing power decreases. This simply means that with every passing year, you have to spend more in order to maintain your standard of living. What about other expenses like retirement and planning for your children’s higher education? Well, obviously, those will cost dramatically more too. A management course that costs Rs 5 lakh today will cost around Rs 13 lakh (at 4% inflation), 15 years hence when your child is ready for it.

To explain it simply, in years when the economy is healthy and there's lots of money in circulation, prices go up, and your rupee buys less.

Inflation complicates long-term savings, because it can mean that while you end up with a larger number of rupees than you had when you started out, that number might have less buying power. So, it's important to look for savings opportunities in which the rate of return is higher than the current rate of inflation. For example, if the rate of inflation is 4% and your rate of return is 8% your real rate of return is 4%. Bottom line: if your savings grow faster than inflation, you wind up in a far better financial position.

You might wonder why, if rates of return can vary, if high rates carry more risk, and inflation can eat into the value of savings, why bother saving? The answer is that by saving and investing judiciously and consistently over time, your wealth will grow and you'll have financial resources when you need them.

Save for long term goals

In the earlier section we have seen that to start with, first you need to build a rainy day fund. But once you have saved an emergency fund (rainy day fund), you need to focus on your other goals - a house, your child’s education, a trip around the world, retirement - whatever it may be.

Let’s put it very simply, investing is putting your money to work for you. In fact it's a very different way to think about how to make money. In our lives we are generally taught to fetch a job or set up some business to make our ends meet. And so that's what most of us do. But there's a limit to how much we can work and how much money we make out of it. Going by the escalating inflation rate, things certainly do not look easy. And besides we should not forget the fact that having a bunch of money is no fun unless we have the leisure time to enjoy it.

So, since you cannot create a duplicate of yourself to increase your working time, you need to send an extension of yourself – i.e. your money to work on your behalf. That way, while you are putting in hours for your employer, sleeping, reading the paper, or socializing with friends, you can also be earning money elsewhere. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a promotion or increment in your salary, decide to work overtime, or look for a higher-paying job.

We also ought to realize that the only thing permanent in life is change. Everything else is temporary. Everyone wants a better lifestyle. We have dreams and aspirations to fulfill and just one life to achieve all this. Today we have a good job, a fat paycheck, but what if things take a downturn? Or if there is an eventuality?

It is thus important that we plan our investments to make our money work harder for us, so that we can achieve our dreams and meet our financial goals, beat inflation, be prepared for any situation in life and also have enough funds to have a good life even after retirement.

For an average person, investing is the only way they can retire and yet maintain their present standard of living. By planning well in advance you can ensure financial stability of your retirement.

Moreover, investing let’s you take advantage of miracle of compounding - Compounding is the fact that the returns that you generate from your investment can be reinvested to make even more money than your initial investment. The money you make goes back to work to make you even more money than before. See put time on your side for benefit of compounding

How is saving different from investing?

Many people believe saving and investing is the same thing. But it is important to understand that the difference between saving and investing for your future is significant. While the saver is interested in protecting his or her assets (money), the investor's goal is to grow or increase the initial amount of money being invested. Like all things, nothing is for free, and growing your money doesn't happen without risk. Being an investor definitely takes more planning and patience, but you'll be better prepared to meet your economic needs in the long run.

Where to invest?

There are different ways of making your money to work for you. It could be as simple as letting your hard-earned money lie in a savings bank account that would fetch you an interest rate of as low as 3.5-4% which is not even good enough to beat the rate of inflation. Investing in Post Office deposit schemes would give you around 8 to 9 % depending on the schemes that too with a lock-in of 5-15 years. Wouldn’t you then want to go in for a much smarter option like directing your funds to the world of stock market where even the safest option of mutual funds could provide you returns of high as 30-50% annual returns - with adequate planning and selection.

There are many different avenues for making an investment. This includes putting money into stocks, bonds, mutual funds, real estate, gold etc. The point
is that no matter the method you choose to invest, the goal is always to put your money to work so it earns you an additional profit. Even though this is a simple idea, it's the most important concept for you to understand.

These are just an indicative return, which some funds have generated in the past. But past performance is not the guarantee of future performance.

Put time on your side

It is important that you start saving early and consistently so that you can reach your financial goals. The sooner you start saving, the more options you'll create for yourself later in life.

When you start to save early, you accumulate more than someone who starts later but makes larger contributions than you because of the magical compounding effect.

You want to know how? Consider the following example -

Risha

Rahul

INVESTMENT per month

2,000

3,000

Starts at the age of

22 years

30 years

Earning returns @ (p.a.)

12

12

Total Investment (in Rs)

6,72,000

7,20,000

Redemption at the age of 50 (in Rs)

55,17,169

29,97,443

Start saving early and you'll be prepared when you need it, whether you're saving for a home, your child's education, or your retirement. If you start saving in your 20s, you'll be off to a great start and will be able to achieve your dreams.

Invest for the long term, and put the power of compounding to work for you.

Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. A real investor does not simply risk his/her money at any random investment but he/she rather performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is putting in your money more carefully in the hope of generating returns.

Speculation, on the other hand, is investing funds with an expectation of some return in the form of capital profit resulting from price change and sale of investment. It occurs when people take risks beyond what they can afford, hoping to make a killing—and it comes in many forms. But speculation would always be a relatively short-term investment. It is based on rumours and tips that might be heard from probably a gossip chain at some broker’s office. It involves a higher quantum of risk as against investment. And returns are earned purely from price differentials.

Investing v/s Speculation:

"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

- Benjamin Graham
Economist and financial analyst (known as Father of Value Investing)

When you invest in shares, you’re buying a share of ownership in a corporation and become a shareholder. Companies sell shares of stock to raise money for start-up or growth. Shares are the riskiest of all the three investment options, but they are also associated with higher returns.

Bonds

A bond is a debt instrument, or simply a loan from the investor (you) to the issuer (mainly a company or the government). In return for the loan, the investor may be paid interest on a periodic basis and at maturity the full principal is returned. Bonds have a stated maturity date and a fixed coupon or interest payment. This is why bonds are called fixed income investments.

Bonds are considered a more stable investment compared to stocks because they usually provide a steady flow of income. But because they’re more stable, their long-term return probably will be less than that of stocks.

Cash Equivalents

Cash equivalents usually provide ready access to your money when you need it, because they can easily be converted to cash. A portion of your portfolio should always be invested in them to provide liquidity as they are referred to as 'liquid assets', that is they are easily accessible for sudden cash needs, and are intended for short-term use. Here are some types of cash-equivalent investment types:

Money Market: A fund usually invested in Treasury bills, CDs and commercial paper from large established institutions. They are typically safe, liquid investments.

A mutual fund is a professionally managed investment vehicle that invests in stocks, bonds and cash-equivalents or any other asset class depending on its objective. The fund is managed by a professional money manager and has a stated objective or investment style.

When you buy a mutual fund, you are pooling your money with a number of other investors, which in turn enables you (as part of a group) to pay a specific fee to the professional manager to select specific securities for you.

Mutual Fund entails the same risk as the above investment options, but the amount of risk depends on which asset class it is invested in.

There are other investment options as well like real estate, commodities (like gold, chana, wheat, silver), derivatives. But we will focus on the above four.

The money you allocate to your investment should not be money that will be required for many years.

In the event of a major negative financial situation, you don't want to be forced to withdraw money that has been allocated in a long term investment to meet the requirements of a short term need. It is therefore imperative that your financial foundation be strong.

You therefore need to build an adequate rainy day fund.

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